The FTSE 100 has rallied well after the Omicron scare. The index showed an incredible 1.5% recovery yesterday, largely dispelling investor concerns. Businesses are now much better prepared to cope with Covid scares. And I think the UK market is a great place to invest my savings right now given the quality dividend stocks on offer. 

Today, I will be looking at two FTSE 100 shares that look like great long-term picks for my portfolio, one for steady passive income and one with growth potential.    

Market leader with 6%+ yield

The British insurance industry is a tough nut to crack. There are several established insurers and asset managers vying for a larger chunk of the market. But Legal & General (LSE:LGEN) has been a name synonymous with the industry for nearly two centuries now.

Recent share price returns have been underwhelming. One-year returns stand at 12.6% and LGEN ranks 50th out of the 100 stocks listed in the footsie for returns over the period. But I see an impressive recovery from pandemic lows when analysts expected inflation and interest hikes to have a more profound impact on the insurance sector this year. 

These returns coupled with the 6.2% dividend yield mean investors collected a tidy profit this year. And unlike previous market crashes, LGEN kept its yield steady across a turbulent 2021, upholding its investor-first strategy. The company is currently trading at a forward price-to-earnings (P/E) ratio of 7.5 times, driven by strong profits from its asset management and life insurance divisions. 

But, the British stalwart has to fend off strong competition from the likes of Aviva and M&G. Also, if Omicron fears strengthen, we could face another large market crash. And insurance shares could suffer as a result. But I’m watching LGEN closely, and will consider a £1,000 investment if the FTSE 100 recovery continues.

Top FTSE 100 performer

Ashtead (LSE:AHT) shares have been on an incredible run lately. One-year returns stand at an impressive 92%, making it the best performing FTSE 100 stock in this period, as of today. But. with Omicron fears plaguing the construction industry, the shares are down nearly 3% in the last month which I see as a rare buying opportunity. 

The company has also been bolstered by its growing presence in the US and Canada. US President Biden’s $1.2trn infrastructure investment plan and is great news for a company that specialises in renting out pricey construction equipment. I think Ashtead has a great business model, allowing smaller projects to cut down on construction costs. Although it’s not a new idea, Ashtead has scaled up its venture well and has attracted investors with consistently strong results. Revenue doubled from £2,546m in 2016 to £5,031m in 2021. The company simply shrugged off the pandemic crash while many large construction businesses struggled.

But this also means that its shares are overvalued right now, trading at a P/E ratio of 32 times. And I expect operational costs to rise with its expanding presence in the US. The larger equipment cache means more repair and upkeep costs. And the company operates primarily in North America and the UK, overlooking developing regions in Asia and Africa that have mammoth expansion projects.

Yet I think its strong focus on stable, defensive growth makes it a good FTSE 100 option for my long-term portfolio today.

Suraj Radhakrishnan has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Some of my favourite FTSE 100 defensive shares have been looking lively. And I reckon the rise of general price inflation could have a lot to do with that.

Warren Buffett once told us an environment of high inflation favours businesses with pricing power and a low asset value on the balance sheet. To me, that sounds like good advice because such enterprises will likely be able to raise their selling prices to preserve profit margins. And they won’t need to spend too much on maintaining assets when costs are rising. So, with that theory in mind, I’m heading for some of the defensives.

Defensives versus cyclicals

To me, defensive stocks are those with steady underlying businesses that have resistance to general fluctuations in the economy. They tend to trade well, generate strong cash flow and keep up their shareholder dividends. And that’s whether the economy is booming, busting or moving sideways.

The other extreme is the cyclical stocks. They tend to suffer in economic slumps and downturns. And they often have a record of erratic revenue, earnings, cash flow and shareholder dividends. Meanwhile, their multi-year share price charts often look like a sketch of the mountains in the highlands of Scotland with many peaks and troughs.

My search for defensive businesses often takes me to sectors such as fast-moving branded consumer goods, information technology (IT), pharmaceuticals & healthcare, utilities, energy, technology and others. And when I’m looking for cyclical businesses it’s usually sectors such as banking & finance, mining, oil & gas companies, retailers, housebuilders & the wider construction industry, transportation, airlines, travel, and others.

6 portfolio candidates

The FTSE 100 has some prime candidates for this defensive, potentially-inflation-fighting, investment strategy. For example, I’m keen on Unilever and Diageo in the branded, fast-moving consumer goods sector. And in pharmaceuticals, GlaxoSmithKline. While in the wider IT, software and technology space, I’m focusing on Experian, Relx and Sage.

However, such beasts rarely have a bargain valuation. And that’s because of often robust quality indicators — the market is usually quick to recognise such attributes by marking up valuations. For example, GlaxoSmithKline’s operating margin is running around 19%. But several are higher, such as Relx near 26% and Diageo above 29%. And percentages like that can be a strong clue that the underlying businesses could have a competitive advantage over their competitors.

A favourable economic environment

But buying quality doesn’t ensure a positive investment outcome. And the possibility of cycling valuations could cause me to lose money on these shares. Defensive stocks can fall in and out of favour with investors from time to time, even though the underlying businesses tend to be less cyclical than many others. And that sometimes causes valuations and share prices to cycle up and down.

But I’m keen on these stocks now because the general economic environment may help them attract investors. So, my guess is valuations and stock prices could cycle higher from where they are now. However, my assessment of the situation could prove to be wrong. Indeed, all shares carry risks. Nevertheless, I’m watching and buying stocks like these now because I also see them as good candidates for a long-term investment portfolio.

Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has recommended Diageo, Experian, GlaxoSmithKline, RELX, Sage Group, and Unilever. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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Yesterday, Tesla (NASDAQ:TSLA) shares dipped below $1,000 for the first time this month. From the highs of $1,222 seen a month ago, this meant that the shares had fallen by 20%. This technically puts the stock in bear territory, which could indicate that there’s further room for the share price to move lower in coming weeks. Here are a few reasons that could drive this move lower.

Valuation concerns

In my opinion, one of the main reasons for the 20% correction and the potential for more is the valuation. I wrote about my unpopular opinion back in late October when Tesla shares broke above $1,000 for the first time. When I look at traditional valuation metrics such as the price-to-earnings ratio, it just seemed too stretched.

Back then, the P/E ratio stood at 332. To put this in perspective, the average FTSE 100 P/E over the past couple of years has been around 15. Granted, stocks within the NASDAQ index have higher P/E ratios given the weighting to tech stocks. Yet it was still a red flag to me when considering potential investment options.

I think that some investors are uncomfortable holding shares with this high a ratio, hence the correction lower. Now that the price is moving down, it can become a spiral as others realise that they might have bought based more around speculation than fundamental value. This could trigger more selling.

More exciting alternatives to Tesla shares?

Another reason why I think Tesla shares could continue to drop is due to more EV investing options being available elsewhere. Tesla is no longer the star of the EV market in my opinion. Both Rivian and Lucid Motors have gained a lot of attention in recent months. These companies are nowhere near the production levels of Tesla, but this early stage could actually attract more investors.

Being able to buy shares at the beginning of the journey as a public company could offer higher rewards in years to come. So I think Tesla shares are perhaps becoming a less attractive option for people seeking exposure to the EV market.

Risks to my view

In the short term, Tesla shares took a hit yesterday from a report that the SEC has opened a case on the company regarding whistleblower complaints. We’ll have to see how this plays out. But I think that the above two reasons are more structural points to suggest that the share price could continue to fall.

I could be wrong here in my view. I’ve been bearish on Tesla shares for over a year, but the share price is up 55% over a one-year period. Speculative flows can keep a share price elevated for longer than I might expect. Further, Tesla is now a profitable company, so strong results looking forward could reduce the elevated P/E ratio.

But I won’t be investing in Tesla shares any time soon. However, I am positive on Rivian shares, so I do see value in the EV market in general.

Jon Smith and The Motley Fool UK have no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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Shares of Royal Mail Group (LSE:RMG) are among the most popular stocks to own in the UK. In fact, just 10 financial institutions have almost 40% of all the outstanding shares on their books. But is this vast popularity reflected in the share price performance? Or should I be looking elsewhere for lucrative investment opportunities?

A closer look at the performance of Royal Mail shares

Similar to my recent dive into Lloyds, Royal Mail shares have delivered pretty underwhelming results, despite their popularity. Over the last five years, the stock has only generated a return of around 11%. That’s the equivalent of an annualised gain of 2.7%, barely beating inflation, meaning a £1,000 investment in December 2016 would now be worth around £1,110.

That’s still better than the disappointing -3% yielded by the FTSE 100 index. And when including the additional income generated by dividends, Royal Mail’s performance does improve. But not enough to satisfy my wealth-building expectations. So, what happened?

From what I can tell, the company grew somewhat complacent over the years, allowing other logistic fulfilment and delivery businesses to steal market share. With its letter delivery division slowly losing steam, its parcel segment left underdeveloped for quite some time, Royal Mail shares have unsurprisingly suffered.

Having said that, management finally seems to be taking action. With increased investments into new logistics centres, e-commerce fulfilment, and international expansion, the stock looks like it could be at the start of a comeback. But with an elevated level of debt on the books, is there a better company for me to invest in?

A future king of online shopping delivery solutions?

There are plenty of parcel delivery firms serving the e-commerce industry today. And most are pretty similar, with no major discernible advantage beyond the size of operations. That’s why Clipper Logistics (LSE:CLG) has caught my attention.

Instead of offering a bog-standard parcel delivery service, the company takes it one step further to provide a complete order fulfilment ecosystem. That means beyond handling delivery, the group offers returns management, inventory tracking, warehousing, and a plethora of other support services uniquely designed for each of its customers.

As such, retailers can focus entirely on developing and selling their products, while Clipper Logistics handles everything related to getting those products into customers’ hands. And this solution has proven to be immensely popular when looking at its client list. Halfords, ASOS, and Morrisons are among many leading businesses letting Clipper handle all their order fulfilment needs. So, I’m not surprised to see the share price jump more than 80% over the last five years.

That’s nearly eight times more than Royal Mail shares have managed to deliver. But it’s not without its risks. As it charges its customers on a usage basis, an economic downturn could significantly affect the revenue stream. After all, if consumers start saving instead of spending, the need for Clipper’s services will naturally start to fall. But given what the company has managed to achieve so far, that’s a risk I’m willing to take for my portfolio.

Zaven Boyrazian has no position in any of the shares mentioned. The Motley Fool UK has recommended Clipper Logistics. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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Building a passive income can be quite a challenge. Fortunately, the stock market is an easy-to-access method of doing just that. Dividends can be lucrative for investors. And the idea of simply receiving money for doing nothing but holding shares in a business is quite an attractive proposition.

There are plenty of UK shares that offer this possibility. But like anything in life, nothing is risk-free. Companies that find themselves in financial difficulties can easily decide to cut or even cancel dividends outright. And such decisions are usually paired with a substantial decline in the share price. In other words, just because a stock offers a dividend doesn’t mean it’s a reliable source of passive income.

That’s why, when I’m looking to bolster my income portfolio, I’m specifically looking for businesses that have strong financials, as well as room to grow, so that dividends can scale up over time. With that in mind, I’ve spotted shares of one UK firm that I believe meet these criteria.

Solving one of e-commerce’s biggest problems

The ongoing transition to online shopping accelerated as Covid-19 forced everyone to stay at home last year. Many non-essential retailers quickly doubled down on expanding their e-commerce offerings. But with such a sudden spike in activity, a serious problem emerged for businesses selling physical goods. I’m talking about the UK’s short supply of warehouse space.

Relatively speaking, the construction time of a new warehouse isn’t that long. However, acquiring land near a central logistics hub has become increasingly challenging, causing well-connected warehouse property values to climb considerably. And with inflation creeping into the economy, this trend appears to be accelerating.

For online retailers, that’s not fun. But for Warehouse REIT (LSE:WHR), it’s a dream come true. As the name suggests, this firm buys, rents and sells warehouses primarily for the e-commerce industry. And it returns the bulk of its profits to shareholders through dividends, generating a sizable stream of passive income.

At today’s share price of £1.66, the dividend yield sits at around 3.7%.  That hardly makes it the highest yielding stock out there. But dividends have actually increased annually by an average of 50% over the last three years. Assuming the firm can continue delivering this impressive payout growth, Warehouse REIT could be an essential piece in building a passive income through the stock market.

Becoming a landlord to build passive income isn’t risk-free

By investing in Warehouse REIT, I’m effectively becoming a landlord who doesn’t have any responsibilities. That certainly sounds more enticing than pursuing a buy-to-let strategy. And it’s one of the reasons why I’m tempted to add the stock to my portfolio. But there are some caveats.

The rising demand for warehouse space hasn’t gone unnoticed by the rest of the industry. And the firm has a pretty long list of competitors. Consequently, bidding wars on properties are becoming more commonplace. As such, it’s possible management could either start missing out on opportunities or begin overpaying for new locations. Either way that doesn’t bode well for the longevity of shareholder dividends. And it potentially compromises my potential passive income stream. Therefore, this is something I’ll be watching closely.

Zaven Boyrazian has no position in any of the shares mentioned. The Motley Fool UK has recommended Warehouse REIT. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

The Shanta Gold (LSE: SHG) share price is down by more than 20%, as I write, after the Africa-based gold miner warned that 2021 production would be up to 15% lower than expected. Shanta shares have now fallen by nearly 40% over the last 12 months.

Today’s fall was triggered by news of technical issues at its New Luika gold mine in Tanzania. These have now been fixed, according to CEO Eric Zurrin. My sums suggest that if Shanta’s 2022 forecasts remain unchanged, this stock could be seriously cheap after today’s crash. Should I consider buying Shanta Gold shares for my portfolio after today’s crash?

What’s gone wrong?

Gold production at Shanta’s flagship New Luika mine has been held back during the fourth quarter by two technical issues. The company says it’s experienced “operational difficulties” relating to supplies of an “unreliable emulsion product” and problems with underground charging units.

According to chief executive Zurrin, emulsion supplies are back to normal, and the charging units have now been fixed.

Unfortunately, these issues forced the company to temporarily change its mining schedule to focus on less productive areas of the underground mine. As a result, Shant’s 2021 gold production is now expected to range 55,000-57,000 ounces this year. This compares to previous guidance in August for 60,000-65,000 ounces.

Why I think Shanta could be cheap

Today’s news is disappointing, but it doesn’t sound too serious to me. 2021 was always expected to be a transitional year for Shanta Gold, with much lower profits than in 2020.

However, 2022 forecasts suggest a strong recovery in earnings. Ahead of today, broker consensus estimates for next year suggested Shanta could generate a net profit of $18.6m in 2022. That’s equivalent to forecast earnings of $2.1 cents per share. At Shanta Gold’s current share price, I estimate that this would price the stock at just six times 2022 earnings.

It’s too soon to be sure, but based on today’s announcement, I don’t see any reason why 2022 forecasts should be cut. If I’m right, then I can see some potential value here, especially as Shanta’s financial position remains strong, with around $20m of net cash and available resources.

Should I buy now?

Shanta has several interesting exploration projects underway but, at the moment, all the company’s revenue comes from the New Luika mine. This means any disappointment here can have a big impact, as we’ve seen today.

One concern for me is that Shanta’s gold production also fell during the first half of this year. This was caused by lower quality ore containing less gold than in 2020. Today’s disappointment adds to this shortfall.

After such a difficult year, I’m not sure how confident I can be in forecasts for 2022. More problems might lie ahead. Although I can see some attractions at Shanta Gold, the situation feels too speculative for me.

For this reason, I won’t be buying Shanta shares today. However, I will keep watching for further news.

Roland Head has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.